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(Solution) If you want the formulas and any calculations, select the corresponding cell and press F2(Function Key on key board), It will show all calculations...

i have the problem attached with the work but not understanding how this problem is solved? Could you break it down easier so i can comprehend how to calculate number to get the answerIf you want the formulas and any calculations, select the corresponding cell and press F2(Function Key on key board),

It will show all calculations and formulas Automatically

Question:

Hastings Corporation is interested in acquiring Vandell Corporation. Vandell has 1 million shares

outstanding and a target capital structure consisting of 30% debt. Vandell's debt interest rate is 8%.

assume that the risk free rate of interest is 5% and that the market premium is 6%. Both Vandell and

Hastings face a 40% tax rate.

Vandell's free cash flow (FCFo) is \$2million per year and is expected to grow at a constant rate of 5% a

year; its beta is 1.4. What is the value of Vandell's operations? If Vandell has \$10.82 million in debt, what

is the current value of Vandell's stock? (hint: use the corporate valuation model)

Solution; Computation of the Value of Operations and Current value of Stock

Calculate the Present Value of all future free cash flow associated with operations

Free cash flow next year =2.0*1.05

2.1

Value of operations =

2.1/ (WACC-5%)

Now first calculate the cost of equity

cost of Equity =

cost of Equity =

5%+1.4*6%

cost of Equity =

13.40%

Let value of equity is Vs then we have

Value of operations = Vs+\$10.82 million

The weight of debt =10.82/ Value of operations

Weight of equity =

(Vops-10.82)/ Value of operations

WACC=10.82/ Value of operations *8% *(1-40%) + (Value of operations -10.82)/ Value of operations *13.4%

WACC =

13.4%-8.6%*10.82/ Value of operations ------2

Substituting the value of WACC in equation 1 we get,

Value of operations =

2.1/ (13.4%-8.6%*10.82/ Value of operations -5%)

Solving we get

8.4%* Value of operations -0.93052=2.1

Value of operations =

3.03052

\$36.08

Now value of equity V

\$25.26 million

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